Rocky Brands, Inc. — FY2023 Form 10-K
Reporting period: Fiscal year ended December 31, 2023. This is an annual report; the filing does not provide a standalone fourth-quarter income statement. Rocky Brands designs, manufactures and markets footwear, apparel and accessories under brands including Rocky, Muck, Georgia Boot, Durango, XTRATUF and Lehigh. Its reportable segments are Wholesale, Retail and Contract Manufacturing.
Key financial results
| Metric | FY2023 | FY2022 | Change |
|---|---|---|---|
| Net sales | $461.8 million | $615.5 million | Down 25.0% |
| Gross profit / margin | $178.6 million / 38.7% | $225.2 million / 36.6% | Margin up 210 bps |
| Operating income / margin | $35.4 million / 7.7% | $44.0 million / 7.2% | Income down 19.7% |
| Interest expense and other, net | $21.2 million expense | $18.3 million expense | Expense increased |
| Net income | $10.4 million | $20.5 million | Down 49.1% |
| Diluted EPS | $1.41 | $2.78 | Down 49.3% |
| Cash from operating activities | $73.6 million | $19.1 million | Up substantially |
| Cash and cash equivalents at year-end | $4.5 million | $5.7 million | Down $1.2 million |
| Total debt, net of issuance costs | $173.1 million | $256.9 million | Down 32.6% |
| Inventory at year-end | $169.2 million | $235.4 million | Down 28.1% |
Operating cash flow benefited mainly from inventory reduction and receivables collections, partly offset by lower accounts payable. Investing activities provided $13.4 million net, including $17.3 million received at closing from the Servus sale and $3.9 million of fixed-asset purchases. Financing activities used $88.2 million, including debt repayments and $4.6 million of dividends.
Year-end gross debt was $175.0 million: $77.9 million under the term facility and $97.1 million under the asset-based revolver. Revolver borrowing capacity was $31.1 million. Working capital was $186.6 million, down from $244.8 million. Management said cash generated from operations and credit facilities should fund operations for at least the next 12 months, subject to operating performance and covenant compliance.
Material changes and segment performance
- Wholesale: Sales fell 30.5% to $337.0 million, reflecting weak demand, excess inventory at wholesale partners, a difficult comparison with delayed 2021 shipments recognized in early 2022, and the Servus and NEOS divestitures.
- Retail: Sales increased 1.4% to $117.0 million, supported by direct-to-consumer e-commerce growth and digital marketing.
- Contract Manufacturing: Sales fell 48.8% to $7.9 million, primarily because certain U.S. Military contracts expired. A new multi-year military contract was awarded in 2023, with minimum shipments through 2026 and an extension option.
- Gross margin improved mainly from 2022 pricing actions, lower inbound logistics costs and a larger Retail sales mix. Operating expenses declined in dollars but increased as a share of sales, to 31.0% from 29.4%, partly because of lower sales.
- Servus was sold in March 2023 for approximately $19.0 million in total consideration; $17.3 million was received at closing and a $1.3 million gain was recorded. The Rock Island, Illinois manufacturing facility, which primarily made Servus products, closed in the third quarter.
Outlook, risks and unusual items
- The filing gives no numerical revenue or earnings guidance. Management cited ongoing macroeconomic uncertainty, inflation, pressure on consumer sentiment, elevated inventory at some wholesale customers and a promotional retail environment. It expects these conditions may continue to create near-term challenges.
- Management highlighted strong product sell-through, improving wholesale-customer inventory levels and progress in brand-building, product innovation and fulfillment. It plans to continue focusing on its core brands and growth opportunities. Expected 2024 capital expenditures are approximately $5.5 million.
- Key risks include consumer-demand and weather sensitivity, seasonality, dependence on wholesale customers, competition, sourcing and shipping disruptions, foreign operations, tariffs, raw-material availability, interest rates, debt covenants, and cybersecurity and information-technology disruption.
- Debt carries variable rates. The term facility’s effective rate was 13.20% at year-end; rates on ABL borrowings varied by type. Both facilities mature in March 2026. The company reported compliance with term-loan covenants; the ABL fixed-charge covenant was not triggered during 2023.
- Potential U.S. customs duty refunds total approximately $7.7 million. The company received $1.9 million in 2023 and $3.2 million in 2022, but has not recorded the remaining potential refunds because collection is uncertain.
- Management reported no goodwill or indefinite-lived intangible impairment in 2023; estimated Wholesale and Retail reporting-unit fair values exceeded carrying values by more than 20%. The auditor identified valuation of indefinite-lived intangibles as a critical audit matter, citing sensitivity to forecasts, margins, discount rates and other assumptions.
- The company is party to litigation with a supplier connected to the acquired brands; management considers a materially adverse outcome remote. Management says ordinary-course legal matters are not expected in aggregate to materially affect financial position, results or liquidity.
- The independent auditor gave unqualified opinions on the financial statements and internal controls. Management and the auditor concluded internal control over financial reporting was effective at year-end. The filing reports no cybersecurity incident in 2023 with a material impact.
Important facts for investors to verify
- Reconcile the cash-flow figure: the MD&A overview says operating cash flow was $54.5 million, while the audited cash-flow statement and detailed MD&A report $73.6 million for FY2023. The audited statement reports $73.6 million.
- Track wholesale demand and customer inventory normalization, and assess whether Retail growth can offset weakness in the much larger Wholesale segment.
- Monitor debt paydown, variable borrowing rates, revolver availability, covenant compliance and the March 2026 maturities.
- Confirm collection of any remaining customs duty refunds; they are contingent and not recognized until received.
- Assess progress under the new military contract and the effect of the Servus divestiture and Rock Island closure on sales, costs and capacity.
- Review seasonal inventory, promotional activity and returns: sales returns and allowances were 8.4% of sales in 2023 versus 6.7% in 2022.